External Financial Resource Management by Listed Pakistani Firms (Financial Reforms) (Report‪)‬

The purpose of this study is to assess the ability of firms to raise external finance through equity, when the firms have different characteristics, have adopted different levels of corporate governance, and are doing business in a weak legal environment. Our empirical analyses also identify the determinants of corporate governance practice and corporate valuation. To investigate these issues, we use firm-level data of 50 corporations listed on Karachi Stock Exchange for the period 2002 to 2007. The results reveal that the firms that need more equity financing practise good governance. The firm-specific factors (size, investment opportunities) matter more in influencing the need of external financing when the legal environment is less investor-friendly. Good investment opportunities and large size provide greater incentive to improve governance practices among firms in Pakistan. The positive association of the corporate governance index and disclosure scores with firm performance suggests that even the firms with poor legal environment can enjoy high valuation if they adopt good governance and disclosure practices. Ownership concentration appeared to be a more important tool to resolve agency conflict between controlling and minority shareholders in the case of Pakistan, where investor protection is weak. These findings suggest that pro-growth policies generate more profitable investment opportunities and stimulate the external financing needs of the corporations. JEL classification: E50, G21, G24, G32